Governor Mervyn King is expected to throw the banks a funding lifeline by widening the collateral the central bank will accept and by injecting more medium-term money into the markets. The moves, expected shortly, are likely to take some of the pressure off inter-bank lending rates and help cut the cost of mortgages.

Britain's lenders have been calling for the measures since the money markets dried up in August last year. Royal Bank of Scotland, indicating that progress was made at a key meeting yesterday bet­ween the chief executives of Britain's five biggest banks and Mr King, called the talks "very reassuring".

HBOS, the Halifax owner whose shares collapsed on Wednesday after being targeted by short-sellers, said: "We had a good and private discussion." Barclays, HSBC and Lloyds TSB declined to comment.

The Bank said that it would "continue [the] close dialogue with the objective of restoring more orderly market conditions".

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Mr King was vilified at the start of the credit crunch for his inflexible and "Victorian" line on the crisis to avoid the "moral hazard" of bailing out a bad bank. His position contrasted with the US Federal Reserve and European Central Bank (ECB), which both made far more medium-term money available to stem the risk to the financial system.

Mr King has since retreated from his earlier position, participating in two globally co-ordinated central bank bail-outs where tens of billions of pounds were offered against a wider range of collateral. Critically, that included standard residential mortgages. Typically, only assets such as Treasury bonds are accepted.

One banking executive has said: "What the industry wants is similar treatment to that provided by the ECB and the Fed. [The Bank] needs to accept a broader range of collateral and the three-month facility should be extended to a more semi-permanent basis."

Liquidity is vital to the banks because they fund long-term loans with short-term borrowings. They would normally raise the short-term funds in the inter-bank market but credit has dried up because US sub-prime losses have made banks nervous about lending to one another.

Central bank funding ensures that the lenders do not default or risk a repeat of the crisis at Northern Rock.

The London inter-bank offered rate for three-month money, the key measure of liquidity, rose one basis point to 5.99pc yesterday - 0.74 percentage points above base rate and the highest this year.

Mr King yesterday demonstrated his commitment to funding by renewing the Bank's £5bn offer of three-day money until the monthly financing period ends in April. Separately, the ECB offered €15bn (£11.7bn) to see banks through the Easter weekend.

Brian Hilliard, an economist at Société Générale, said: "The issue is how long [the Bank] can go on tolerating these distortions in the money market. "